The Economy Sir, Please!

By Dzulkefly Ahmad

After the winding-up by the second finance minister on the budget debate at the committee level in the Dewan Rakyat on Nov 11, I felt compelled to write my two-cent worth of thought on our economy.

For a start, news about China’s stimulus package of US$586 billion, or RM2.1 trillion, not capable of counteracting the effect of the US-led slowdown and that the euphoric rally in the Asian bursas lasting only one day, which was Monday, are indeed very frightening.

The RM5 billion injection to shore up ‘undervalued stocks’ by ValueCap, as instructed by the finance minister, flies in your face and how much quicker, you thought, will it dissipate.

Yes, we have had for some time now, a strong current account surplus, a trade surplus and a strong foreign reserve to support our currency. Despite all these, the ringgit has fallen to a level that does not match its arguably strong fundamentals.

There is a lot more in finance that we simply fail to understand.

The ringgit has weakened by 7.3% against the US dollar and is down 13.3% from its peak of RM3.1320 on April 23. It was quoted at RM3.560 versus the greenback on Nov 14. All this happens when the greenback is being severely battered.

Some are even anticipating that it may trade at RM3.6 by year-end against the US dollar and lower still in the following year. Portfolio investment leaving the Asian bursa and making a beeline for the US State Treasury bills may not augur well with us too.

Many financial strategists in credible research houses are now saying that ringgit performance is, more importantly determined by decreasing international reserves, large fiscal deficit, falling commodity prices and the contagious or boomerang effect of global economics.

Frankly, many analysts do not see our numbers improving. On the contrary, it may continue to fall unabated. We witnessed our foreign reserves shrinking from US$116 in August to US$109.6 billion in September and very recently US$107.6 billion on Oct 15.

With falling commodity prices in crude oil and crude palm oil well below 50% of their projected price in the PM’s budget, we are anticipating a huge reduction in our revenue projection, hence an increasing deficit surely beyond the government’s adjusted number of 4.8% in the new finance minister’s budget.

Workers being laid off

To make matter worse, the economic slowdown will see demands for our commodities dwindling as the global economy slows down and recession-deflation setting in. Similarly demands for our manufactured goods will equally be reduced as our trading partners reduce their spending. Our trade surplus and current account surplus will subsequently shrink.

Manufacturers will start to lay off workers as to cut cost. Already they are. The numbers laid off are distressing not the least are those retrenched across the causeway. All these will definitely have a knock-on effect on our macroeconomic parameters of unemployment and slowing growth which would adversely affect our currency and sovereign rating. Downgrading of our sovereign rating from A to A- aggravates our cost of borrowing and competitiveness.

Our NPLs (non-performing loans) may be as low as 2.5% (net) of our GDP as at end of August but that may soon reverse. During the financial crisis of 1998, NPLs were at 13.6% (net). More alarmingly our household debt to GDP ratio has hiked to 66.7% as at end of 2007, while it was only at 44.4% during the last financial crisis.

It could be a lot worse right now. Under inflationary pressures due to our own misdoing of hiking the fuel prices in June this year, the price hike in everyday goods and services coupled with lower disposable income, situation could drastically deteriorate.

Will the stimulus package work - at what price and for how long?

These are raging questions that need urgent redress especially by policy makers that in turn must be communicated to all as to ‘shore up confidence’, arguably true as stressed by the second finance minister. We have to ‘leverage’ (bad word now) on both our fiscal and monetary policies to get our economy going on an expansionary or anti-cyclical approach. But could we? How fast?
Firstly, on the RM7 billions. Where is it coming from? Rightly from the saving of fuel subsidy as allocated in the budget of RM21 billion. With the reduction in fuel price at the pumps, the government expected a saving of RM7 billion. Hence there is no external injection, but simply coming from expected savings.

However, that’s not very realistic, because you could only spend what you have. But it looks like we don’t have it. Besides, Finance Minister Najib Abdul Razak only conceded losing RM8 billion in term of revenue, while Pakatan Rakyat’s budget expected RM18 billion to say the least.
Entire ship is sinking

Will they be doing the obvious of outright borrowing, from again our national saving EPF (Employees Provident Fund) or raising bonds? If it’s true, say so and make it clear. Will they be creative to unlock some real assets of the government in term of securitising and monetising lands or buildings? But please stop cannibalising on our national savings such as the pension fund.

It must be made clear that nobody is in to score political points in facing this crisis. The entire ship is sinking. We could wait till we get to the shore. But the issues that need addressing are, will the stimulus package work? Will RM7 billion be sufficient?

In which critical areas would injection be made as to effect the greatest ‘multiplier effect’? Surely not in the capital or share market! How do we encourage consumer spending? Giving them higher disposable income by reducing their EPF saving will certainly ‘shortchanged’ them later. It may not be wise after all. Are the incentives sufficient to boost private sector investment?
How long are we to do this? Will we witness an immediate recovery over the range of 12 to 18 months or a V-shaped recovery as economists put it? Or a U-shaped one, over 2 to 3 years or L-shaped crisis like one experienced by Japan for a long time?

And for as long as the details of the proposed spending have not been presented to Parliament, it may be pertinent for the government to peep at the Pakatan’s strategy in facing the crisis. Having settled for the strategic issues, the next is to iron out of ‘how to make it happen’.

Admittedly it is quite consoling to see that the BN government has finally heeded the critiques by many, to have open-tender system in place, especially for mega-projects.

But the proof is in the doing. Enough of lip-service and mantras - however religiously sermonised. The ‘ineptness’ of the BN’s financial and economic leadership have to end. Otherwise, the people and voters would have to effect change earlier then the next general election.

But currently every wannabe is engulfed in ruling party’s election. That will certainly take precedence until March 2009.